Most nonelderly americans receive their

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1 Employers Benefits from Workers Health Insurance ELLEN O BRIEN Georgetown University Most nonelderly americans receive their health insurance coverage through their workplace. Almost all large firms offer a health insurance plan, and even though they face greater barriers to providing coverage, so do the majority of very small firms. These employment-based plans cover two-thirds of nonelderly Americans and pay most of working families expenses for health care and about one-quarter of national health spending. Despite employers role in the health insurance market, however, very little attention has been paid to employers motivations for providing health insurance to workers. Why do employers offer health insurance to workers? Is it because workers want it? Because their unions demand it? Or do employers offer health benefits to workers because their productivity and profitability depend on it? The standard economic theory of the availability of employer-provided health insurance focuses on worker demand (Cutler 1997; Pauly 1997; Summers 1989). According to that theory, employers are willing to arrange health insurance plans for workers because workers are willing to buy that health insurance through wages reduced by the amount of the cost of the insurance. The theory states that rather than receiving additional cash compensation and finding and purchasing health insurance on their own, workers prefer to obtain coverage through their employers and so accept a wage offset to cover the cost of that coverage. This theory has a number of problems, though, not the least of which is that the data The Milbank Quarterly, Vol. 81, No. 1, 2003 c 2003 Milbank Memorial Fund. Published by Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and PO Box 1354, 9600 Garsington Road, Oxford OX4 2DQ, UK. 5

2 6 Ellen O Brien provide very little support for it. Despite decades of effort to demonstrate its validity, the empirical basis for the theory of compensating differentials remains surprisingly weak. Many empirical studies suggest that workers covered by employment-based health insurance plans earn more, not less, than do workers without health benefits (Buchmueller and Lettau 1997; Levy and Feldman 2001; Monheit et al. 1985; Simon 2001). But rather than reassess the theory, economists have focused on why the empirical research fails to produce the expected result. This article makes a case for reassessing the theory. A key flaw in the standard theory is that it ignores the benefits accruing to employers from offering health benefits. According to the conventional view, employees pay the full cost of coverage presumably because they believe that the benefits of health coverage are entirely for themselves. The alternative view that I am investigating posits a business case for employmentbased health coverage, acknowledging that employers may want to offer coverage because offering a compensation package composed of both wages and health insurance is more profitable than providing wages alone. Employers might benefit from providing health insurance, for example, if it allowed them to recruit and retain high-quality workers. Perhaps employees who demand health benefits have other qualities that employers value; they might be forward-looking or less mobile (e.g., workers with children). Thus by offering health insurance, the firm could attract employees who anticipate establishing a long-term employment relationship. Firms might also provide health insurance if health insurance improves workers health, by increasing their productivity at work and reducing absenteeism and turnover. Moreover, workers in good jobs are happier and more productive. Rather than having only some workers insured or having wide variation in the extent and quality of coverage as would likely happen if workers were left on their own to purchase insurance employers could benefit from having all or most of their employees covered under plans with standard minimum benefits. This business case merits a passing mention in some discussions of the availability of employment-based health benefits (see Currie and Madrian 1999, 3368; Wolaver, McBride, and Wolfe 1997), but it is not central to the standard theory, and economists have typically minimized its importance. In a discussion of the impact of a government mandate, for example, economist Mark Pauly ruled out any real benefits to the employer. Employer-provided health benefits, he argued,

3 Employers Benefits from Workers Health Insurance 7 will have little effect on the employer s bottom-line. Workers may be a little bit healthier and a little happier...and that will presumably benefit employers a little. But the main consequences, positive or negative, of increasing workers insurance coverage will fall on the workers themselves (Pauly 1997, 84). In a recent paper in which he reviewed existing empirical evidence, economist Thomas Buchmueller also found that employers reap few or no spillover benefits from providing health insurance to workers. Academic studies, he concluded, show little evidence that health insurance improves workers health and productivity, reduces turnover, or substantially cuts employers costs associated with workers compensation and absenteeism (Buchmueller 2000). Despite the short shrift afforded the business case in mainstream economics, it seems worthwhile to reassess it. Although Buchmueller s review may seem to settle the matter, he neglected to discuss a number of recent studies analyzing the productivity effects of poor health. But perhaps a more compelling reason for a reassessment is that many employers seem to think health and health coverage affect workers productivity and organizational performance. A burgeoning health and productivity management literature argues that the value of health coverage far exceeds its direct cost to employers. Even if employers have only recently begun to appreciate the value of health coverage for employee and firm performance, as some experts suggest (e.g., Ceniceros 2000), it would be helpful to document and understand that shift in perceptions. Changes in the business community s perceptions of the value of secondary education in the early 20th century offer a useful comparison. As economic historian Claudia Goldin explained, at the turn of the century, education at the secondary and higher level was viewed as providing private, not public, goods: unlike the elementary schools, which taught basic skills thought to be essential to a democracy and needed to coordinate commercial activity, high schools were often depicted as producing skills accruing entirely to the individual (Goldin 2001, 19 20; italics added ). By the early 20th century, though, people and training, not capital and technology, had become the new concerns. Capital embodied in people human capital mattered. The result of this shift in perceptions, according to Goldin, was that for the first time the post-literacy schooling of the masses was perceived to greatly enhance economic production (Goldin 2001, 1). The growing sense in the American business community that secondary education mattered to them helped spur investments in education.

4 8 Ellen O Brien Like education, health is a key component of human capital (Becker 1964; Fuchs 1966; Grossman 1972). Education and skills, after all, are embedded in people, whose productivity depends on their health. It thus seems reasonable to suspect that at the turn of the 21st century, employers may have concluded that health insurance coverage and other investments in their employees health are important to productivity and organizational performance and more now than in the past because of advances in medical care and its rising cost. Indeed, employers are said to be concerned with the return on investments in employer-provided on-the-job training, for which U.S. employers budgeted an estimated $58.6 billion in 1997 (Bartel 2000, 502). It thus seems incongruous that employers would see no potential for returns on investments in health, on which more than $335 billion was spent in 2000 (Cowan et al. 2002). Furthermore, even if empirical progress has been slow to date, it bears keeping in mind that economists have frequently struggled to demonstrate the empirical importance of certain propositions because the principal concern is notoriously difficult to measure. In a revealing comment in a lengthy survey article on health, health insurance, and the labor market, economists Janet Currie and Brigitte Madrian observed that academic research has only recently substantiated that health is a consequential determinant of labor market outcomes. Economic agents, however, have long recognized the importance of this relationship (Currie and Madrian 1999, 3363). Their comment is noteworthy because it acknowledges that it took economists a very long time to quantify a phenomenon that seems intuitive to noneconomists (i.e., that health affects individual economic performance). The question I am raising is whether economists should make a greater effort to assess the relationship between health coverage and firms outcomes. The Business Case Why do employers offer health insurance benefits to workers? The cost and tax advantages of employment-based coverage, along with workers willingness to pay at least part of the cost, may be the primary factors. To better understand the reasons for the availability of employment-based coverage, however, it is necessary to look at the value of health insurance coverage not just to employees but to employers as well.

5 Employers Benefits from Workers Health Insurance 9 Why Do Workers Want Employment-Based Coverage? Workers want health insurance for themselves and their families in order to protect against the catastrophic costs of serious illnesses and to ensure access to medical care. For those without the time or income to save for it, insurance may be the only way to obtain medical care that would otherwise be unaffordable (Nyman 1999). Although it is possible for individuals to purchase insurance on their own, the high cost of private individual coverage, barriers to access to that coverage, and steep transactions costs help account for the value of group coverage to workers and thus explain why, in the absence of any viable alternative, workers demand coverage through their employers. Employment-based coverage is far less expensive than individually purchased coverage, for several reasons. First, through pooling, employers can reduce adverse selection and administrative expenses. These cost advantages are significant, especially for large firms. Moreover, employers are able to offer relatively inexpensive health insurance because most people covered by employment-based plans are in good health. Those people who are most expensive to insure the elderly and people with serious disabilities and chronic conditions are typically covered by public programs such as Medicare and Medicaid, thereby reducing the cost of employment-based insurance (Davis 2001). Second, under federal law, employment-based insurance receives special tax treatment. Although employees pay income tax on their wage earnings, the portion used for health insurance is not taxed as income, and payroll taxes do not include the amount paid for these benefits. And if their employers arrange for it, employees can also pay their share of the insurance premium out of pretax income. Indeed, the tax advantages for employment-based coverage are significant. According to one estimate, the tax exclusion reduces the price of employment-based health insurance by an average of 27 percent (Gruber and Poterba 1996, cited in Currie and Madrian 1999, 3366). By contrast, individuals buying insurance on their own must pay for health insurance with aftertax dollars. They receive no tax benefit unless their spending on medical care exceeds 7.5 percent of their adjusted gross annual income, and they must itemize the deductions on their tax return. (The self-employed, however, may deduct a portion of the amount paid for health insurance premiums 60 percent in 2000 when determining their taxable income.)

6 10 Ellen O Brien Third, the transactions costs of buying an individual insurance policy are high for both individual workers and their families. Even when workers and their families are young and healthy, shopping for insurance in the individual market requires a lot of time to assess and compare different plans benefits. In those states where the individual market is not well regulated, premiums vary substantially by age and health status. Moreover, health insurers may exclude coverage for certain conditions, exclude coverage for some services, or deny coverage altogether for people with preexisting health conditions or who are perceived to be at high risk (Pollitz, Sorian, and Thomas 2001). By comparison, because risks are pooled in group health insurance plans, the cost to an individual does not depend on his or her particular health status. These advantages of employment-based health insurance suggest that it is worth considerably more to most workers than the additional wages that some economists say they would earn in its absence. Because there is no dollar-for-dollar trade-off a similar product in the individual market, if available at all, would be much more expensive and impose transactions costs on workers and their families the value to the employee of employment-based health benefits far exceeds whatever the employer is paying for it. Indeed, given the cost advantage to the employer, there is quite a bit of leeway for employers to get the wage/benefits bundle wrong and still leave employees better off than they would be if given only wage compensation and left to their own devices (Currie and Madrian 1999, 3366). Do workers also regard insurance in this way? Surveys confirm that workers view employment-based health insurance as a very valuable benefit of work. Most workers report that the availability of health insurance is a key factor in their decision to take or keep a job. In one recent survey, 73 percent of workers said that the insurance provided by their employer was a very important factor in their decision to take or keep a job (Duchon et al. 2000). Of all the fringe benefits offered by employers, health insurance was by far the most important: 65 percent of workers in another survey ranked health insurance as the most important employee benefit, compared with 21 percent who said a retirement savings plan was the most important benefit (Salisbury and Ostuw 2000). In addition, most workers with employment-based health insurance reported that either they were satisfied with the amount of health insurance benefits they were receiving or would prefer a higher benefit (87 percent); only 10 percent said that they would prefer a higher wage (Salisbury and Ostuw 2000).

7 Employers Benefits from Workers Health Insurance 11 In another study of what workers wanted at work, having some say in benefits decision-making was ranked third in importance after influence in deciding how to do their job and organize their work, and deciding what training is needed. But although workers reported that they did, in fact, have a good deal of influence on the organization of work and training, they reported having very little influence on decisions about benefits, substantially less influence than they would like (Freeman and Rogers 1999, 48 9). At the same time, other research has found that employees believe their employers are good agents in the market for health coverage (Peele et al. 2000). What Do Employers Gain? If workers prefer to obtain health insurance through their employers rather than on their own, why are employers willing to act as their health insurance agents? Part of the explanation undoubtedly rests with the tax incentives for employers to offer coverage to workers and their dependents. Payments for health insurance are deducted from gross revenues in calculating the employer s taxable income, and they also are excluded from the base payroll in determining the employer s share of the payroll tax for Medicare and Social Security. More important, however, employers may want to offer health insurance to their workers because failing to do so could harm the firm s performance. The evolution of company-sponsored medical care plans suggests that employers have long recognized the value of providing health insurance to workers. With the rapid growth of manufacturing and unions before World War I, the provision of welfare benefits, including health insurance, was widely acknowledged to be good business : The employee plans relieved the employer of the solicitations for aid for the destitute dependents of deceased employees; also, it was not necessary for the employees to pass the hat among themselves during working hours for the same purpose; the program assisted in attracting better employees and in retaining those already employed, employee morale was enhanced, job relations improved and the public relations of some firms favorably affected. (Strong 1950, cited in Munts 1967, 8) The history of early union-sponsored sickness funds (which offered protection against lost income and coverage for medical expenses) reveals that unions had strategic considerations in mind when they offered these funds. That is, the growth of union-sponsored funds in the 1880s was

8 12 Ellen O Brien based on the notion that the union benefits would help retain workers during depressions, strikes, and wage cuts. Providing protection against illness for workers and their families was expensive, however, and in the search for the greatest appeal to workers, the discussion shifted back and forth between the need for low dues as an incentive for workers to join the union, and better benefit systems through higher dues as incentives to stay, between wage and job security on the one hand and security against the expenses of illness and death on the other. (Munts 1967, 4 5) These historical references suggest that early employer and union plans were formed in response to the needs of both the workers and the sponsoring organizations. Just as workers still need financial protection today and undoubtedly more so because of the high cost of medical care employers also still benefit from offering health benefits to workers. The economic value of health insurance to employers comes from a variety of sources. First, because the productivity of any firm depends on the quality of its employees, employers may provide health insurance in order to attract high-quality workers. Although many job-related factors affect the number and quality of the applicants an employer succeeds in attracting such as the nature of the work, wages, and opportunities for promotion health insurance may be a required component of a competitive compensation package. Simple observation suggests that health insurance is the common denominator in employer fringe benefit packages. According to the standard theory, firms offering health benefits are more likely than those not offering them to attract workers in poor health (or with sick dependents) who are more costly and less productive (Lazear 1998, 418). But this characterization may not accurately represent the attitudes of the majority of prospective employees or the choices they face. Even healthy workers are likely to value employmentbased health insurance at far more than its cost. Moreover, the additional cash compensation that some economists assert would be forthcoming without health benefits may not, in fact, be provided. Second, once employers hire workers, they have a vested interest in keeping them. The costs of hiring and especially for turnover are expensive when employers have invested in training and workers have firmspecific skills. If the basic model of the wage-health insurance trade-off holds and employees value health insurance at the cost to their employers of providing it, then health insurance can be considered as just another

9 Employers Benefits from Workers Health Insurance 13 component of the compensation package, and its effects on turnover should not be different from receiving the cash equivalent of health insurance in wage compensation. However, since group health insurance plans typically end when a worker leaves a firm (or shortly thereafter if COBRA coverage is available and the worker elects to enroll in it), turnover involves changing not only jobs but also health insurance. In addition, the loss of health insurance may leave a worker and family exposed to uninsured changes in health status. Some workers may be able obtain coverage through a new employer, but in many cases they must undergo a waiting period for coverage, and plans often exclude coverage for preexisting medical conditions (although the 1996 Health Insurance Portability and Accountability Act addressed this portability problem and protects those people in employer plans who have already served out an exclusion period for preexisting conditions from facing another such period, provided they have maintained continuous coverage). Health insurance benefits can, therefore, help keep workers in a firm, whereas dissatisfaction with health benefits may cause workers to consider other employment opportunities (Rynes and Gearhart 2000, 33 4). Employers may also have productivity or recruiting considerations in mind when deciding to provide retiree health benefits. Firms with a stable, long-term workforce may offer retiree health benefits to encourage efficient retirement patterns. Without health benefits, a firm s turnover may be too high, and without retiree benefits, workers decisions to delay retirement may interfere with the firm s productivity. The recent erosion in retiree benefits may mean that employers no longer believe they need to provide retiree health benefits to attract high-quality workers or encourage efficient retirements. Third, health insurance may enhance workers effort and productivity because of the psychosocial aspects of having a good job. Most workers recognize that good health coverage is necessary to ensure access to medical care and protect economic well-being. Consequently, the simple fact of its offering health insurance may increase satisfaction with a job. Conversely, the lack of insurance imposes burdens on workers and their families. For the uninsured, the financial consequences of a serious illness can quickly exhaust the additional wages provided to workers not offered employment-based health coverage. Workers who do not have to worry as much about their own illnesses or those of family members covered by health insurance may also be more productive. The economic theory of

10 14 Ellen O Brien efficiency wages may justify an employer s decision to provide health benefits. The theory of efficiency wages suggests that employers who pay their workers more than the going market rate are likely to have more productive workers. Employees who would have a difficult time finding a better-paying job if they left or were fired from their current job work harder than do workers who could easily move to another job that paid equally well. Thus, some employers pay above-market wages in order to reduce turnover, improve morale, and obtain the best performance from their employees. Most employers investment in their workers extends beyond wages to include education and training, health coverage, and other compensation and work-life benefits. Many analysts accept as fact that investments made in human resources, employee services and general workplace environment have a positive impact on productivity. Consequently, firms expenditures for health coverage and services can be viewed as a complex investment designed to maintain and improve health (Berger et al. 2001, 23). Fourth, health insurance may contribute to workers and firms productivity, as healthy workers are usually more productive than unhealthy workers. Since workers with health insurance may be more likely to seek regular preventive care and get needed treatment for illnesses and injuries, those with health insurance may be less likely to miss work and to miss fewer days of work when they do fall ill. Workers absences are expensive to employers finding temporary replacements is costly; the operation of production teams may suffer; and assets may be left idle and sick employees may be less productive when they are at work. Similarly, other workers in the firm do not feel obligated to work harder to compensate for employees who are absent or unproductive at work. Unhealthy workers also may quit or retire early, creating a costly source of turnover. The benefits to employers of having healthier workers may also lower other labor costs, especially the cost of short-term and long-term disability insurance and workers compensation. Finally, it may simply make more sense for employers to provide health insurance because it is good business for their workers to have more or less standard health insurance benefits. Workers seeking coverage on their own may end up with different levels of insurance protection. Even if those differences reflect the workers varying preferences, they may not meet their employers needs, and many workers may end up without insurance and face high out-of-pocket bills or difficulties getting needed medical care.

11 Employers Benefits from Workers Health Insurance 15 Do employers think health coverage affects workers and firms performance? The cost, quality, and generosity of the health coverage and of the other kinds of health-related investments that employers make all vary. Some employers offer comprehensive and generous health benefits. Some also provide access to on-site medical care and prevention and wellness programs. Some even invest in community health activities and work with providers to improve the quality of medical care available to the community as a whole. These differences suggest that employers may perceive different returns on these investments. However, at least anecdotal evidence from employer surveys and commentary in the business press shows that most employers believe that health insurance and their employees health are important to productivity and organizational performance. In surveys of employers both large and small, employers report that offering health benefits improves the firm s performance. In one recent survey, a large majority of small employers (78 percent) reported that offering health benefits affected recruitment; three-fourths said that it helped retain employees; and a similar proportion maintained that it improved employees attitudes and performance. Two-thirds reported that health benefits helped improve the health of employees, and almost 60 percent believed that helped reduce absenteeism (EBRI/CHEC/BCBSA 2000). To human resource experts, the conventional wisdom is that health insurance matters to the firm s performance. Health benefits are used to recruit and retain the best employees in a competitive labor market, and investments in health, including health insurance, wellness programs, and disability management, are seen as key components of a strategy of investing in the firm s human capital. Consultants advising employers also frequently stress the gains to employers from offering coverage. Organizations may experience reduced costs and a more loyal workforce, one consultant suggested. Furthermore, when benefits are made available to lower-level employees as well as core employees, the effect is to emphasize a team concept and strengthen relationships between employees (Davy 1998). Consultants acknowledge, however, that a full understanding of the impact of employee benefits on productivity has been lacking and is just starting to emerge. Those corporate benefit managers and chief financial officers who emphasized controlling the cost of employee benefits now realize that managing productivity losses is more important than controlling costs. Employers are now concerned with managing medical

12 16 Ellen O Brien costs with an eye toward how the management of disease will affect lost time and productivity (Ceniceros 2000). With respect to some of these investments in health, some employers have begun to assess the effect on productivity of investing in their employees health and to calculate the return on their investment. As one analyst observed, Programs that focused on health, disability, absence and turnover [have rarely] been associated with the achievement of corporate objectives. However, there is an increasing awareness that these programs may play a significant role in achieving improved organizational productivity and, for commercial enterprises, improved profitability (Goetzel et al. 2001, 15). Evidence of the Effects of Health Insurance Are employers perceptions of the value of health and health coverage consistent with the evidence from empirical studies? Is health coverage associated with measurable gains in health and productivity? Is absenteeism reduced? Do the benefits of health coverage justify its costs? The existing empirical research can shed some light on these questions, but it is hardly conclusive. Substantial gaps in research remain. Worker Quality and Turnover Do firms offering health benefits recruit and retain higher-quality workers than do firms that do not provide health coverage to workers? Are firms offering health insurance more likely to attract workers interested in a long-term employment relationship? Many studies (see table 1) suggest that workers in jobs with health insurance coverage change jobs less frequently than do workers in jobs without health benefits (Anderson 1997; Buchmueller and Valletta 1996; Madrian 1994b; Monheit and Cooper 1994; Slade 1997). Evidence for this relationship remains somewhat mixed, however, with other studies suggesting that offering health insurance has very little or no effect on job turnover (Holtz-Eakin 1994; Kapur 1997; Mitchell 1982; Penrod 1995). Moreover, even if researchers could agree on whether and how much health coverage affects turnover, they would still disagree about the productivity implications of the turnover effect.

13 Employers Benefits from Workers Health Insurance 17 Study Mitchell 1982 Monheit and Cooper 1993 TABLE 1 Health Insurance and Job Turnover Key Findings No effect of health insurance (HI) on job change or job departure. Employment-based HI reduces turnover by 25% for married women, 38% for married men, 29% for single men, and 30% for single women. Being likely to gain employment-based HI as a result of turnover increases turnover by 28% to 52%; being likely to lose HI as a result of turnover reduces turnover by 23% to 39%. The effect of health conditions on turnover varies in sign and significance with condition. Madrian 1994b Employment-based health insurance reduces turnover by 25% to 30% when identified by spousal health insurance, by 32% to 54% when identified from family size, and by 30% to 71% when identified from pregnancy. Gruber and Madrian 1994 Holtz-Eakin 1994 Penrod 1995 Buchmueller and Valletta 1996 Anderson 1997 Slade 1997 Kapur 1998 One year of continuation coverage increases job turnover by 10%. No effect of employment-based HI on job turnover. Little evidence supporting an effect of health insurance on job departure. Employment-based health insurance reduces turnover by 35% to 59% for married men, 37% to 53% for married women, 18% to 33% for single men, and 35% for single women. Among those with employment-based health insurance, spousal coverage increases turnover by 26% to 31% for married men and 34% to 38% for married women. Employment-based HI reduces job mobility for those for whom losing coverage would be costly. Lack of employment-based HI increases mobility for those who would benefit most by having it. Individuals who change jobs frequently are less likely to be employed in jobs with HI. On job change, the effect of the availability of and the demand for HI is sensitive to empirical specification. There is no significant or substantive impact of health insurance on job departure. Note: These studies were reviewed in Currie and Madrian 1999,

14 18 Ellen O Brien Empirical studies also show that the availability of health benefits affects retirement choices (see table 2). Individuals covered by employment-based health insurance plans while working are less likely to retire early (i.e., before they reach age 65 and become eligible for Medicare) if doing so would mean losing those health benefits. Therefore, access to employer-sponsored retiree health benefits substantially increases the likelihood of early retirement (Karoly and Rogowski 1994; Madrian 1994a; Rogowski and Karoly 2000). The continuation of coverage options is also shown to increase the likelihood of early retirement (Gruber and Madrian 1993), but to a lesser extent than do employerfunded retiree health benefits, since retirement choices also depend on the cost of coverage to workers ( Johnson, Davidoff, and Perese 1999). No studies addressed the issue of worker quality, and there is far from any consensus on what the impact of health coverage on retirement means for firms productivity and profitability. Health and Worker Productivity The existing studies found little evidence that workers with health coverage are absent less often than are workers without coverage. For example, the Rand Health Insurance Experiment found that the effect of insurance coverage on work loss days was small and insignificant (Buchmueller 2000, 14). Similarly, despite years of research outside mainstream economics (in human resources and industrial psychology), there is almost no direct evidence regarding the effect of health insurance coverage on morale and worker productivity and the firm s performance. In those fields, although the link between employment practices and productivity is widely recognized, the linkages between productive behavior and psychosocial job structure have remained unclear in the eyes of many observers (Karasek and Theorell 1990, 162). However, there is compelling research demonstrating that health insurance has a powerful influence on access to health care, the timeliness of care, the amount and quality of care received, and fundamental health (see table 3). People without health insurance are less likely to seek medical care, less likely to get it, and, as a result, more likely to be in worse health and have higher death rates than are people with insurance coverage (for comprehensive reviews of this evidence, see ACP ASIM 1999; Hadley 2001; and U.S. Congress 1992). Uninsured persons have a much greater risk of health

15 Employers Benefits from Workers Health Insurance 19 Study Hurd and McGarry 1993 Karoly and Rogowski 1994 TABLE 2 Health Insurance and Retirement Decisions Key Findings Workers who have retiree health insurance that is at least partially funded by their employers are 18% to 24% less likely to be working full time beyond age 62 than are workers without health insurance. The probability of early retirement increases by 50%, or 9 percentage points, among workers with access to health insurance. The availability of health insurance in addition to employer-sponsored insurance (ESI) increases the likelihood of early retirement. There is a sizable and significant effect of continuation coverage on retirement among males age 55 to 64. Gruber and Madrian 1993 Madrian 1994a Individuals with retiree health insurance retire five to 16 months earlier than those without ESI. The probability of retiring before age 65 is between 7 and 15 percentage points higher for workers with retiree health insurance. Gustman and Steinmeier 1994 Lumsdaine, Stock, and Wise 1994 Gruber and Madrian 1995 Blau and Gilleskie 1997 Rust and Phelan 1997 Fronstin 1999b Rogowski and Karoly 2000 Employment-based health benefits lower retirement age by 1.3 months. The effect triples when the value of health benefits to workers is used rather than cost to employer. Retiree health benefits have no impact on retirement behavior. Continuation of coverage group rate subsidies encourage early retirement for those not yet eligible for Medicare. The probability of retiring increases 32% (2.2 percentage points) for each additional year of continued coverage. Among men ages 51 to 62, the availability of retiree health benefits increased the rate of retirement by 2 percentage points per year when retirees were required to contribute to the cost of coverage, and 6 percentage points per year when they were not, an increase of between 26% and 80% in the retirement probability. The rate of retirement increases with age. Men aged 60 to 61 with retiree health insurance were as much as 10 percentage points more likely to retire than men without such insurance. Postretirement pension benefits and the availability of retiree health benefits have a significant influence on workers retirement age expectations. Workers with access to retiree health benefits were 68% more likely to retire than were their counterparts without access to ESI. Note: These studies were reviewed in Fronstin 1999a, 7 11.

16 20 Ellen O Brien TABLE3 Health Insurance and Health Study Young and Cohen 1991 Ayanian et al Franks, Clancy, and Gold 1993 Sorlie et al Ayanian et al Baker et al Key Findings Compared with privately insured patients, uninsured heart attack patients were 15% to 43% less likely to receive a major heart procedure and were 50% more likely to have died within 30 days of discharge, if discharged alive (13.1% mortality compared with 8.3%). Controlling for disease stage, uninsured women with breast cancer (with local or regional disease) had a 50% lower survival probability up to five years postdiagnosis; no difference for women with distant disease. Uninsured persons were 1.25 times more likely to die than were privately insured persons; almost twice as many uninsured persons had died after 17 years (18.4% compared with 9.6%). Compared at baseline with privately insured persons, uninsured persons were 1.2 to 1.5 times more likely to have died after five years. Controlling for other risk factors, uninsured persons were significantly less likely to receive screening and preventive services and, due to cost, significantly more likely to report not seeing a physician when sick. Uninsured persons were 1.4 times more likely to have a major health decline or to die and were 1.2 times more likely to develop an activity limitation (difficulty walking or climbing stairs). Note: These studies were reviewed in Hadley decline and death, with several studies showing them to be 1.2 to 1.5 times more likely to die than are insured persons (Baker et al. 2001; Franks, Clancy, and Gold 1993; Sorlie et al. 1994). Studies examining access to care and the outcomes of treatment for persons with specific diseases or medical conditions also found that the uninsured receive less timely care and less intensive care and suffer worse outcomes as a result. Uninsured women with localized breast cancer have a 50-percent lower probability of survival compared with insured women (Ayanian et al. 1993). Similarly, uninsured heart attack patients were shown to be less likely to undergo a major heart procedure and more likely to die (Young and Cohen 1991). Even when the uninsured are

17 Employers Benefits from Workers Health Insurance 21 relatively healthy, they are less likely to receive screening and preventive services and are more likely to report not seeing a physician when sick because of cost (Ayanian et al. 2000). Although some studies suggest, to the contrary, that health insurance has little impact on health outcomes (Perry and Rosen 2001; Ross and Mirowsky 2000), the consensus view of a recent Institute of Medicine panel was that the links between health insurance coverage and access to care and health coverage and overall health were well established (Institute of Medicine 2001, 2002). A number of economic studies also demonstrated that health matters for individual labor market outcomes, including labor force participation, hours worked, and earnings (see table 4). People in poor health or with specific health conditions like arthritis, depression or other psychological disorders, or chronic backache, for example, worked less and earned less than did people in good health (Bartel and Taubman 1979; Chirikos and Nestel 1985; Ettner, Frank, and Kessler 1997; Fronstin and Holtmann 2000; Mitchell and Butler 1986; Rizzo, Abbott, and Berger 1998). Workers were also more likely to quit and retire early when they were in poor health (Diamond and Hausman 1984). Researchers are also beginning to calculate the costs to employers of unhealthy employees. Some studies demonstrated that poor health may be related to increased absenteeism (see table 5) and lower productivity (see table 6). Other studies examined the effects on workplace productivity of specific health conditions and health risks, including hypertension, heart disease, obesity, depression, and asthma. These studies showed that the productivity effects of illness result mostly from absences (Frank and Manning 1992; Paringer 1983; Rizzo, Abbott, and Berger 1998; Rizzo, Abbott, and Pashko 1996; Vistnes 1997; Yen, Edington, and Witting 1992). Poor health, as the studies of workers labor market outcomes suggested, may also lead to turnover and early retirement. In extreme cases, poor employee health may also lead to premature death, resulting in significant turnover costs to employers from the search for new workers and subsequent training (Greenberg, Finkelstein, and Berndt 1995, 27). Research also demonstrates that exhausted, depressed, sick, or injured workers are not energetic, accurate, or innovative at work, leading to productivity losses. The studies show that poor health reduces workers productivity at work, and that effective health care treatments can reduce productivity losses and may even pay for themselves in terms of increased productivity (Berndt et al. 1998; Burton et al. 1998, 1999,

18 22 Ellen O Brien TABLE4 Health and Workers Labor Market Outcomes Study Bartel and Taubman 1979 Diamond and Hausman 1984 Chirikos and Nestel 1985 Mitchell and Butler 1986 Pincus, Mitchell, and Burkhauser 1989 Mullahy and Sindelar 1994 Ettner, Frank, and Kessler 1997 Rizzo et al Fronstin and Holtmann 2000 Key Findings Poor health (hypertension and heart disease) reduces earnings by 8.5%. Bad health has a larger impact on retirement than do any of the other demographic variables examined (education, marital status, number of dependents, wealth). Compared over ten years with workers in good health, poor health reduces earnings by 12% to 28%, depending on race and gender. Men with arthritis had 15% to 30% lower annual earnings than did men without arthritis, depending on its severity. Earnings of men and women with arthritis were 30% to 63% of the earnings of people without arthritis. Direct and indirect effects of alcohol abuse are prominently displayed in income. Empirical results suggest that alcoholism has negative indirect effects on income attributable to reduced educational attainment and increased marital disruption. These are greater than the direct effects. Psychiatric disorders significantly reduce employment among both men and women. Conditional on employment, results are a small reduction in work hours and a substantial drop in income. In the aggregate, psychiatric disorders reduced the probability of employment by about 15%. Average annual productivity losses per worker due to chronic backache were $1,230 for male workers, measured in 1996 dollars, and $773 per female worker. Aggregate annual productivity losses from chronic backache were approximately $28 billion in the United States. Productivity losses from chronic backache differ by gender and other sociodemographic characteristics. Aggregate labor productivity losses associated with chronic backache were quite large and comparable to estimates of the direct medical costs associated with treating this chronic illness. Health insurance increases the likelihood of good health, which in turn increases expected earnings. The annual increase in earnings for men working full time and for a full year ranges from $97 to $381 and, for women, from $47 to $467.

19 Employers Benefits from Workers Health Insurance 23 TABLE5 Health, Health Care, and Absenteeism Study Paringer 1983 Mintz et al Yen, Edington, and Witting 1992 Nichol et al Rizzo, Abbott, and Pashko 1996 Key Findings Health status and age are the principal determinants of work absences; economic variables have little impact on time lost from work. Perceived health status is an important predictor of hours lost when all workers are included in a regression equation. Age is significantly related to the number of work days missed because of an illness; the effect varies by gender and occupation. Functional work impairment is common among workers with depression: 11% are unemployed, and 44% experience on-the-job performance problems (absenteeism, decreased productivity, interpersonal problems). These impairments are highly responsive to treatment, given adequate time. Employee health has a significant impact on costs of medical claims and losses due to absenteeism. Most costs of absenteeism are due to illness. Among the health-related measures significantly related to absence were smoking, drug and medication use, blood pressure, and total cholesterol. Vaccination against influenza has substantial healthrelated and economic benefits for healthy, working adults. Primary study outcomes included upper respiratory illnesses, absenteeism from work because of upper respiratory illnesses, and visits to physicians offices for upper respiratory illnesses. During the threemonth follow-up period, those who received the vaccine reported 25% fewer episodes of upper respiratory illness than those who received a placebo (105 vs. 140 episodes per 100 subjects); 43% fewer days of sick leave from work due to upper respiratory illness (70 vs. 122 days per 100 subjects); and 44% fewer visits to physicians offices for upper respiratory illnesses (31 vs. 55 visits per 100 subjects). The cost savings were estimated to be $46.85 per person vaccinated. The net benefits to employers from having workers take prescription medicines for their chronic illnesses are substantial. (continued)

20 24 Ellen O Brien Study TABLE5 Continued Key Findings Assuming average compliance rates were achieved, net benefits to employers in 1987 amounted to $286 per hypertensive employee, $633 per employee with heart disease, $822 per depressed employee, and $1,475 per type II diabetic employee under medication from a physician. These estimated benefits accrue because prescription medications substantially lower absenteeism among chronically ill workers. Kessler and Frank 1997 Work impairment is one of the adverse consequences of psychiatric disorders. In comparison, the average prevalence of psychiatric work loss days (six days per month per 100 workers) and work cutback days (31 days per month per 100 workers) do not differ significantly across occupations. There is substantial variation across occupations in the prevalence of psychiatric disorders, with an average prevalence of 18.2% for any disorder. The effects of psychiatric disorders on work loss are similar across all occupations, while effects on work cutback are greater among professional workers than those in other occupations. Vistnes 1997 Most absenteeism is related to illness. For both men and women, health status measures (such as selfreported health status and medical events) more consistently explain absenteeism than do economic factors Rizzo, Abbott, and Berger 1998 such as wages. Average annual productivity losses from chronic backache per worker between $733 (women) and $1,230 (men), resulted in 1996 in an aggregate annual productivity loss in the United States of $28 billion. These productivity losses are quite large, comparable to direct medical costs for treating this chronic illness. 2001; Frank and Manning 1992; Kessler and Frank 1997; Rizzo, Abbott, and Berger 1998; Rizzo, Abbott, and Pashko 1996). Researchers trying to quantify the indirect costs of illness to employers reported that these indirect costs frequently surpassed employers direct expenditures on health benefits. When employers factor in the indirect costs such as those for replacement workers, overtime premiums, productivity losses due to unscheduled work absences, and productivity